M&T Trying Its Hand in Hard Market To the North

M&T Bank Corp. is tiptoeing into Toronto.

The unusual foray of an American bank into Canada's deeply entrenched market is not a major move in terms of dollars and personnel; M&T is establishing a single business-banking branch about 100 miles from its Buffalo home. But it comes against a backdrop of near-constant Canadian bank migration to the south and shows that even a famously cautious bank won't waver from its long-term goals in pursuit of profits in tight times.

"It is long overdue for [M&T] to have a presence there, for how close they are in proximity," said Matthew Clark, an analyst at Keefe, Bruyette & Woods Inc. "It just complements what they already do."

Clark noted that no other U.S. regional bank has opened a Canadian branch in recent memory. But of all regional banks, M&T may be the best-positioned to make such a cross-border move, even if the expansion's relative modesty is in keeping with the tight times. The $68 billion-asset company said on Monday that it is sending a team of three business bankers north to build on relationships it already has with hundreds of Canadian and U.S. customers that do a lot of business across the border.

M&T described the branch as a low-risk way to go after a new market in its backyard while getting a leg up on rivals in the U.S. that are still reeling from the financial crisis.

"We already have a Canadian base that we do business with — we'll be able to meet with them on their home ground," said Brian Hickey, M&T's executive vice president in charge of commercial banking in upstate New York. "For most U.S. companies in the Northeast and Mid-Atlantic, if they are going to go international, the easiest place to go is to Canada. This positions us uniquely as one of the few banks in the Northeast that has a fully operational local office in Canada."

Regional banks across the U.S. have pegged small-business lending as a potentially lucrative area of expansion, and M&T is earning bragging rights — and sending a clear signal that it is strong and open for business — by making a run at a foreign market, observers said.

M&T applied to open the branch in early 2008, and Canadian regulators finally signed off on the plan last month. The office, in downtown Toronto, is to open this week and will offer deposit and loan products to Canadian distributors, manufacturers and other businesses with annual sales of $10 million to $500 million. It is not a retail branch.

Though U.S. bank analysts say the move makes strategic sense while illustrating M&T's financial health, one Canadian bank analyst said M&T has a poor chance of making headway in Canada. The country's five largest banks, having long ago pretty well carved up the market, have always made it tough for U.S. entrants, said Mario Mendonca, co-head of equity research at Canaccord Genuity.

"Historically, they don't do well," he said. "Our Canadian banks are well entrenched in every community."

He said it takes a lot of people and branches to make a dent in any Canadian market, resources that M&T is not committing at this point. And M&T's U.S. ties give it no edge over native companies with big U.S. operations such as Toronto-Dominion Bank or Royal Bank of Canada, he said.

Still, analysts said M&T has little to lose and much to gain by establishing a beachhead to the north.

"One branch never really is that meaningful," said Amanda Larsen, an analyst at Raymond James & Associates Inc. "However, I would think that area has similar demographics to their upstate New York footprint. It is more of a contiguous expansion."

M&T, which has stayed profitable through the downturn, is among the few U.S. financial institutions that played it safe ahead of the recession and are now reaping the rewards for a conservative approach.

Hickey said M&T began evaluating nearby markets for a new business banking office in late 2007, considering Massachusetts and Delaware as well as Canada. It concluded that Toronto would make sense given how close it is to Buffalo. He said M&T also does business with "several hundred" Canadian companies so that it has a foothold in the market already.

"It is not going to be a lot of cold-calling," he said.

M&T started plotting the expansion in early 2008, and spent two years talking with Canadian regulators before the superintendent of financial institutions gave its final approval last month.

The process took longer than M&T had initially anticipated, as Canadian regulators — among the toughest in global banking — became even more cautious after the mid-2008 financial crisis, he said.

"It seemed like, given all the noise in U.S. banking, they also were keenly interested in our capital structure," Hickey said. "The conversations were quite in depth."

Though M&T will operate under a different regulator in Canada, he said this would not change how it underwrites or prices business loans and services.

"It looks like they're quite comfortable with us doing things the way we've done them," he said. "We're going to take deposits and make loans just as we do here."

The three-person office — to be staffed with one principal and two relationship managers — will first work with customers in the U.S. and Canada that it already knows, with an emphasis on small-business loans in the range of $10 million to $50 million, a market Hickey said may be underserved by Canadian banks.

He said M&T's approach in Canada will be firm but not desperate. Aggressive expansion has never been the bank's modus operandi, and there is no plan for other Canadian branches at this point.

"If we could put $30 million on the books by the end of the year we'd be pleased," he said. "We'll go after the market aggressively; at the same time, we'll take what it gives us. We're not focused on pure asset growth."